CODE OF FEDERAL REGULATIONS TITLE 47 - TELECOMMUNICATIONS CHAPTER I FEDERAL COMMUNICATIONS COMMISSION

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1 CODE OF FEDERAL REGULATIONS TITLE 47 - TELECOMMUNICATIONS CHAPTER I FEDERAL COMMUNICATIONS COMMISSION PART 65 - INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND METHODOLOGIES ANNOTATED REVISED AS OF AUGUST 1, 1998 LATEST ORDER DATED FEBRUARY 20, 1997 Annotations to these Part 65 rules are found at the end of any paragraph, section, or subsection revised since its original version. A cumulative index of all revisions is found preceding the Table of Contents. Waivers - An asterisk indicates the existence of a waiver applicable to tariff participants for a particular section or subsection of the rules. A reference to the order granting the waiver is found at the end of the section or subsection. This annotated version of the Federal Communications Commission's Part 65 Rules was prepared by the National Exchange Carrier Association, Inc. () staff as a supplement to the Commission's rules. This supplement is believed to be complete and current as of the date indicated, but is not intended to supersede 47 C.F.R. Part 65. makes no claim to original U.S. Government works. The copyright notice is limited to the arrangement, compilation, notes and references in this otherwise public domain material. If any errors are found, please refer them to: Annotated Rules Administrator, Room 2B22, 100 South Jefferson Road, Whippany, NJ Telephone (973) mdanson@neca.org. Copyright 1998, National Exchange Carrier Association, Inc.

2 INDEX PART 65 ANNOTATIONS Part 65 was added to Title 47 of the Code of Federal Regulations by a December 20, 1985 Order: ORIGINAL ORDER, Released 12/20/85, Effective 1/15/86. Interstate Services of AT&T Communications and Exchange Telephone Carriers, CC Docket No , Phase II, Report and Order, 51 Fed. Reg (Jan. 15, 1986). ERRATUM, 51 Fed. Reg (Feb. 6, 1986). ERRATUM, 51 Fed. Reg (Apr. 23, 1986). ANNOTATION CITES RATE OF RETURN ORDER, Released 3/24/86, Effective 4/30/86. (R-1) Authorized Rates of Return for the Interstate Services of AT&T Communications and Exchange Telephone Carriers, CC Docket No , Phase I, Memorandum Opinion and Order, 51 Fed. Reg (Apr. 1, 1986). AT&T RATE OF RETURN ORDER, Released 8/25/86, Effective 10/17/86. (R-2) Authorized Rates of Return for the Interstate Services of AT&T Communications and Exchange Telephone Carriers, CC Docket No , Phase II, Memorandum Opinion and Order on Reconsideration, 104 FCC 2d 1404 (1986). REPORTS ORDER, Released 12/3/86, Effective 3/9/87. (R-3) Common Carrier Services; Reporting Requirements for Interstate Rates of Return, CC Docket No , Report and Order, 1 FCC Rcd 952 (1986). COE ALLOCATION ORDER, Released 5/1/87, Effective 1/1/88. (R-4) Common Carrier Services; Allocation of Costs Between the State and Interstate Jurisdictions, CC Docket Nos , and , Report and Order, 2 FCC Rcd 2639 (1987). RATE BASE ORDER, Released 12/24/87, Effective 1/1/88. (R-5) Amendment of Part 65 of the Commission s Rules to Prescribe Components of the Rate Base and Net Income of Dominant Carriers, CC Docket No , Report and Order, 3 FCC Rcd 269 (1988). ERRATUM, 3 FCC Rcd 2473 (1988). RATE BASE RECONSIDERATION ORDER, Released 2/22/89, Effective 8/28/89. (R-6) Amendment of Part 65 of the Commission s Rules to Prescribe Components of the Rate Base and Net Income of Dominant Carriers, CC Docket No , Order on Reconsideration, 4 FCC Rcd 1697 (1989). AT&T PRICE CAPS ORDER, Released 4/17/89, Effective 5/17/89. (R-7) Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No , Report and Order, 4 FCC Rcd 2873 (1989). LEC PRICE CAPS ORDER, Released 10/4/90, Effective 10/31/90. (R-8) Policies and Rules Concerning Rates for Dominant Carriers, CC Docket No , Second Report and Order, 5 FCC Rcd 6786 (1990). ERRATUM, 5 FCC Rcd 7664 (1990). Final Rule Correction, 55 Fed. Reg (Dec. 7, 1990). i Revised: August 1, 1998

3 INDEX - Continued PART 65 ANNOTATIONS LEC PRICE CAPS RECONSIDERATION ORDER, Released 4/17/91, Effective 6/10/91 for all provisions except 61.45(d) and (b) (eff. 6/30/91). (R-9) Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No , Order on Reconsideration, 6 FCC Rcd 2637 (1991). ERRATUM, released 4/26/91 (DA ). ERRATUM, released 4/30/91 (DA ). TRANSPORT RATE STRUCTURE AND PRICING ORDER, Released 10/16/92, Effective 2/19/92. (R-10) Petition for Waiver of the Transport Rules filed by GTE Service Corporation, CC Docket No , Report and Order and Further Notice of Proposed Rulemaking, 7 FCC Rcd 7006 (1992). EXPANDED INTERCONNECTION ORDER, Released 10/19/92, Effective 2/16/93. (R-11) Expanded Interconnection with Local Telephone Company Facilities, CC Docket No and CC Docket No , Report and Order and Notice of Proposed Rulemaking, 7 FCC Rcd 7369 (1992). REGULATORY REFORM ORDER, Released 6/11/93, Effective 8/05/93. (R-12) Regulatory Reform for Local Exchange Carriers Subject to Rate of Return Regulation, CC Docket No , Report and Order, 8 FCC Rcd 4545 (1993). EXPANDED INTERCONNECTION ORDER, Released 09/02/93, Effective 11/16/93. (R-13) Expanded Interconnection with Local Telephone Company Facilities and Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, CC Docket Nos and , Second Report and Order and Third Notice of Proposed Rulemaking, 8 FCC Rcd 7374 (1993). AFUDC ACCOUNTING ORDER, Released 2/28/95, Effective 9/06/95. (R-14) The Accounting and Ratemaking Treatment for the Allowance for Funds During Construction (AFUDC), CC Docket No , Report and Order, 10 FCC Rcd 2211 (1995). RATE OF RETURN ORDER, Released 4/06/95, Effective 7/03/95 (except for Effective 8/30/95). (R-15) Amendment of Parts 65 and 69 of the Commission's Rules and Reform the Interstate Rate of Return Represcription and Enforcement Processes, CC Docket No , Report and Order, 10 FCC Rcd 6788 (1995). FILING REQUIREMENTS ORDER, Released 11/13/96, Effective 3/08/97. (R-16) Revision of Filing Requirements, CC Docket No , Report and Order, 11 FCC Rcd (1996). ERRATUM, 12 FCC Rcd (1997). POSTRETIREMENT BENEFITS ORDER, Released 02/20/97, Effective 4/30/97. (R-17) Responsible Accounting Officer Letter 20, Uniform Accounting for Postretirement Benefits Other than Pensions in Part 32, AAD 92-65, and Amendments to Part 65, Interstate Rate of Return Prescription Procedures and Methodologies, Subpart G, Rate Base, CC Docket No , Report and Order, 12 FCC Rcd 2321 (1997). Note: Editor's Note: Prior to October 1986, not all Orders we re published in the FCC Record. For Orders never published in the FCC Record, we have used the Federal Register cite. See Amendment of Revised: August 1, 1998 ii

4 Sections 0.416, 0.455, and 1.14 of the Commission's Rules, Order, 1 FCC Rcd 1046 (1986). iii Revised: August 1, 1998

5 TABLE OF CONTENTS PART 65 - INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND METHODOLOGIES Section Page Subpart A - General 65.1 Application of Part Subpart B - Procedures Participation and acceptance of service designation Initiation of unitary rate of return presciption proceedings Petitions for exclusion from unitary treatment and for individual treatment in determining authorized return for interstate exchange access service Procedures for filing rate of return submissions Page limitations for rate of return submissions Discovery [Removed]...4 Subpart C - Exchange Carriers [Removed] [Removed] Calculations of the components and weights of the cost of capital Cost of equity Cost of debt Cost of preferred stock Capital structure Calculation of the weighted average cost of capital Calculation accuracy [Removed] Net income...7 Subpart D - Interexchange Carriers Net income [Removed]...8 I Revised: August 1, 1998

6 Subpart E - Rate of Return Reports (R-3) Rate of return reports...9 TABLE OF CONTENTS - Continued PART 65 - INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND METHODOLOGIES Section Page Subpart F - Maximum Allowable Rates of Return (R-1) Determining the maximum allowable rate of return Period of review Measurement of interstate service earnings [Removed] Subpart G - Rate Base (R-5) Rate base Definitions Included items Deducted items...13 Revised: August 1, 1998 II

7 65.1 Subpart A - General 65.1 Application of Part 65. (a) This part establishes procedures and methodologies for Commission prescription of an authorized unitary interstate exchange access rate of return and individual rates of return for the interstate exchange access rates of certain carriers pursuant to This part shall apply to those interstate services of local exchange carriers as the Commission shall designate by rule or order, except that all local exchange carriers shall provide to the Commission that information which the Commission requests for purposes of conducting prescription proceedings pursuant to this part. (R-7,8,15) (b) Local exchange carriers subject to through of this chapter are exempt from the requirements of this part with the following exceptions: (R-15) (1) Except as otherwise required by Commission order, carriers subject to through of this chapter shall employ the rate of return value calculated for interstate access services in complying with any applicable rules under Parts 36 and 69 that require a return component; (2) Carriers subject to through of this chapter shall be subject to (d). (3) Carriers subject to through of this chapter shall continue to comply with the prescribed rate of return when offering any services specified in 61.42(f) of this chapter unless the Commission otherwise directs; and (4) Carriers subject to through of this chapter shall comply with Commission information requests made pursuant to 65.1(a). 1 Revised: August 1, 1998

8 65.100/65.102(a) Subpart B - Procedures Participation and acceptance of service designation. (R-15) (a) All interstate exchange access carriers, their customers, and any member of the public may participate in rate of return proceedings to determine the authorized unitary interstate exchange access or individual interstate exchange access rates of return authorized pursuant to (R-15) (b) Participants shall state in their initial pleading in a prescription proceeding whether they wish to receive service of documents and other material filed in the proceeding. Participants that wish to receive service by hand on the filing dates when so required by Part 65 shall specify in the their initial pleading in a prescription proceeding, as specified in (b) and (c), an agent for acceptance of service by hand in the District of Columbia. The participant may elect in its pleading to receive service by mail or upon an agent at another location. When such an election is made, other participants need not complete service on the filing date, and requests for extension of time due to delays in completion of service will not be entertained. (R-15) Initiation of unitary rate of return presciption proceedings. (R-15) (a) Whenever the Commission determines that the monthly average yields on ten (10) year United States Treasury securities remain, for a consecutive six (6) month period, at least 150 basis points above or below the average of the monthly average yields in effect for the consecutive six (6) month period immediately prior to the effective date of the current prescription, the Commission shall issue a notice inquiring whether a rate of return prescription according to this part should commence. This notice shall state: (1) The deadlines for filing initial and reply comments regarding the notice; (2) The cost of debt, cost of preferred stock, and capital structure computed in accordance with , and ; and (3) such other information as the Commission may deem proper. (R-15) (b) Based on the information submitted in response to the notice described in (a)(1) and on any other information specifically identified, the Commission may issue a notice initiating a prescription preceding pursuant to this part. (R-15) (c) The Chief, Common Carrier Bureau, may issue the notice described in (a). (R-15) Petitions for exclusion from unitary treatment and for individual treatment in determining authorized return for interstate exchange access service. (R-15) (a) Exclusion from unitary treatment will be granted for a period of two years if the cost of capital for interstate exchange service is so low as to be confiscatory because it is outside the zone of reasonableness Revised: August 1,

9 65.100/65.102(a) for the individual carrier's required rate of return for interstate exchange access services. (R-2,15) 3 Revised: August 1, 1998

10 65.102(b)/65.104(a) Petitions for exclusion from unitary treatment and for individual treatment in determining authorized re turn for interstate exchange access service. (Cont'd) (R-15) (b) A petition for exclusion from unitary treatment and for individual treatment must plead with particularity the exceptional facts and circumstances that justify individual treatment. The showing shall include a demonstration that the exceptional facts and circumstances are not of transitory effect, such that exclusion for a period of at least two years is justified. (R-2,15) (c) A petition for exclusion from unitary treatment and for individual treatment may be filed at any time. When a petition is filed at a time other than that specified in (b)(2), the petitioner must provide compelling evidence that its need for individual treatment is not simply the result of short-term fluctuations in the cost of capital or similar events. (R-15) (d) [Deleted] (R-2) Procedures for filing rate of return submissions. (R-15) (a) Rate of return submissions listed in (b)(1) and (c) may include any relevant information, subject to the page limitations of The Chief, Common Carrier Bureau, may require from carriers providing interstate services, and from other participants submitting rate of return submissions, data, studies or other information that are reasonably calculated to lead to a full and fair record. (R-2,15) (b) In proceedings to prescribe an authorized unitary rate of return on interstate access services, interested parties may file direct case submissions, responses, and rebuttals. Direct case submissions shall be filed within sixty (60) calendar days following the effective date of a Commission notice initiating a rate of return proceeding pursuant to (b). Rate of return submissions responsive to the direct case submissions shall be filed within sixty (60) calendar days after the deadline for filing direct case submissions. Rebuttal submissions shall be filed within twenty-one (21) calendar days after the deadline for filing responsive submissions. (R-15) (c) Petitions for exclusion from unitary treatment and for individual treatment may be filed on the same date as the deadline for filing responsive rate of return submissions. Oppositions shall be filed within 35 calendar days thereafter. Rebuttal submissions shall be filed within 21 calendar days after the deadline for filing responsive submissions. (R-15) (R-15) (d) An original and 4 copies of all rate of return submissions shall be filed with the Secretary. (e) The filing party shall serve a copy of each rate of return submission, other than an initial submission, on all participants who have filed a designation of service notice pursuant to (b). (R-15) Page limitations for rate of return submissions. (R-15) Rate of return submissions, including all argument, attachments, appendices, supplements, and supporting materials, such as testimony, data and documents, but excluding tables of contents and summaries of argument, shall be subject to the following double spaced typewritten page limits: (R-15) Revised: August 1,

11 (a) The direct case submission of any participant shall not exceed 70 pages in length (b)/65.104(a) 5 Revised: August 1, 1998

12 65.104(b)/ Page limitations for rate of return submissions. (R-15) (Cont'd) (b) The responsive submission of any participant shall not exceed 70 pages in length. (c) The rebuttal submission of any participant shall not exceed 50 pages in length. (d) Petitions for exclusion from unitary treatment shall not exceed 70 pages in length. Oppositions to petitions for exclusion shall not exceed 50 pages in length. Rebuttals shall not exceed 35 pages in length Discovery. (R-15) (a) Participants shall file with each rate of return submission copies of all information, including studies, financial analysts' reports, and any other documents relied upon by participants or their experts in the preparation of their submission. Information filed pursuant to this paragraph for which protection from disclosure is sought shall be filed subject to protective orders which shall be duly granted by the Chief, Common Carrier Bureau, for good cause shown. (R-15) (b) Participants may file written interrogatories and requests for documents directed to any rate of return submission and not otherwise filed pursuant to (a). The permissible scope of examination is that participants may be examined upon any matter, not privileged, that will demonstrably lead to the production of material, relevant, decisionally significant evidence. (R-15) (c) Discovery requests pursuant to (b), including written interrogatories, shall be filed within 14 calendar days after the filing of the rate of return submission to which the request is directed. Discovery requests that are not opposed shall be complied with within 14 calendar days of the request date. (R-15) (d) Oppositions to discovery requests made pursuant to (b), including written interrogatories, shall be filed within 7 calendar days after requests are filed. The Chief, Common Carrier Bureau, shall rule upon any such opposition. Except as stayed by the Commission or a Court, any required response to a discovery request that is opposed shall be provided within 14 calendar days after release of the ruling of the Chief, Common Carrier Bureau. (R-15) (e) An original and 4 copies of all information described in (a) and all requests, oppositions, and responses made pursuant to (a), (b) and (d) shall be filed with the Secretary. (R- 15) (f) Service of requests, oppositions, and responses made pursuant to (b), and (d) shall be made upon all participants who have filed a designation of service notice pursuant to (b). Service of requests upon participants who have filed designation of service notices pursuant to (b) shall be made by hand on the filing dates thereof. (R-15) [Removed] (R-15) Revised: August 1,

13 65.200/ Subpart C - Exchange Carriers [Removed] (R-15) [Removed] (R-15) Calculations of the components and weights of the cost of capital. (a) Sections specify the calculations that are to be performed in computing cost of debt, cost of preferred stock, and financial structure weights for prescription proceedings. The calculations shall determine, where applicable, a composite cost of debt, a composite cost of preferred stock, and a composite financial structure for all local exchange carriers with annual revenues in excess of $100 million. The calculations shall be based on data reported to the Commission in FCC Report (See 47 C.F.R ) The results of the calculations shall be used in the represcription proceeding to which they relate unless the record in that proceeding shows that their use would be unreasonable. (R-15) (b) Excluded from cost of capital calculations made pursuant to shall be those sources of financing that are not investor supplied, or that are otherwise subtracted from a carrier's rate base pursuant to Commission orders governing the calculation of net rate base amounts in tariff filings that are made pursuant to section 203 of the Communications Act of 1934, 47 U.S.C. 203, or that were treated as "zero cost" sources of financing in section 450 and Subpart G of this Part 65. Specially excluded are: accounts payable, accrued taxes, accrued interest, dividends payable, deferred credits and operating reserves, deferred taxes and deferred tax credits. (R-15) Cost of equity. (R-15) The cost of equity shall be determined in represcription proceedings after giving full consideration to the evidence in the record, including such evidence as the Commission may officially notice. (R-15) Cost of debt. (R-15) The formula for determining the cost of debt is equal to: Embedded Cost of Debt = Total Annual Interest Expense Average Outstanding Debt Where: "Total Annual Interest Expense" is the total interest expense for the most recent two years for all local exchange carriers with annual revenues of $100 million or more. "Average Outstanding Debt" is the average of the total debt for the most recent two years for all local 7 Revised: August 1, 1998

14 65.200/ exchange carriers with annual revenues of $100 million or more. (R-15) Revised: August 1,

15 65.303/ Cost of preferred stock. (R-15) The formula for determining the cost of preferred stock is: Cost of Preferred Stock = Total Annual Preferred Dividends Proceeds from the Issuance of Preferred Stock Where: "Total Annual Preferred Dividends" is the total dividends on preferred stock for the most recent two years for all local exchange carriers with annual revenues of $100 million or more. "Proceeds from the Issuance of Preferred Stock" is the average of the total net proceeds from the issuance of preferred stock for the most recent two years for all local exchange carriers with annual revenues of $100 million or more. (R-15) Capital structure. (R-15) The proportion of each cost of capital component in the capital structure is equal to: Proportion in the capital structure = Where: Book Value of particular component Book Value of Debt + Book Value of Preferred Stock + Book Value of Equity "Book Value of particular component" is the total of the book values of that component for all local exchange carriers with annual revenues of $100 million or more. "Book Value of Debt + Book Value of Preferred Stock + Book Value of Equity" is the total of the book values of all the components for all local exchange carriers with annual revenues of $100 million or more. The total of all proportions shall equal (R-15) Calculation of the weighted average cost of capital. (R-15) (a) The composite weighted average cost of capital is the sum of the cost of debt, the cost of preferred stock, and the cost of equity, each weighted by its proportion in the capital structure of the telephone companies. (b) Unless the Commission determines to the contrary in a prescription proceeding, the composite weighted average cost of debt and cost of preferred stock is the composite weight computed in accordance with multiplied by the composite cost of the component computed in accordance with or 9 Revised: August 1, 1998

16 65.303/ , as applicable. The composite weighted average cost of equity will be determined in each prescription proceeding. Revised: August 1,

17 65.306/ Calculation accuracy. (R-15) In a prescription proceeding, the final determinations of the cost of equity, cost of debt, cost of preferred stock and their capital structure weights shall be accurate to two decimal places [Removed] (R-15) Net income. (R-5) (a) Net income shall consist of all revenues derived from the provision of interstate telecommunications services regulated by this Commission less expenses recognized by the Commission as necessary to the provision of these services. The calculation of expenses entering into the determination of net income shall include the interstate portion of plant specific operations (Accounts ), plant nonspecific operations (Accounts ), customer operations (Accounts ), corporate operations (Accounts ), other operating income and expense accounts (Accounts ), and operating taxes (Accounts ), except to the extent this Commission specifically provides to the contrary. (b) Gains and losses related to the disposition of plant in service items, shall be handled as follows: (1) Gains related to property sold to others and leased back under capital leases for use in telecommunications services shall be recorded in Account 4360 (Other Deferred Credits) and credited to Account 6563 (Amortization Expense - Tangible) over the amortization period established for the capital lease. (2) Gains or losses related to the disposition of land and other nondepreciable items recorded in Account 7150 (Gains and Losses Resulting from the Sale of Land and Artworks) shall be included in net income for ratemaking purposes, but adjusted to reflect the relative amount of time such property was used in regulated operations and included in the rate base; and (3) Proceeds related to the disposition of property depreciated on a group basis and used jointly in regulated and nonregulated activities including sale-leaseback arrangements for property depreciated on a group basis, shall be credited to the related reserves and attributed to regulated and nonregulated in proportion to the accumulated regulated and nonregulated depreciation for that group. (c) Gains or losses related to the disposition of property that was never included in the rate base shall not be considered for ratemaking purposes. (d) Except for the allowance for funds used during construction, reasonable charitable deductions and interest related to customer deposits, the amounts recorded as nonoperating income and expenses and taxes (Accounts ) and interest and related items (Accounts ) and extraordinary items (Accounts ) shall not be included unless this Commission specifically determines that particular items recorded in those accounts shall be included. (R-14) 11 Revised: August 1, 1998

18 65.500/ Subpart D - Interexchange Carriers Net income. (R-15) The net income methodology specified in shall be utilized by all interexchange carriers that are so designated by Commission order. (R-15) [Removed] (R-15) Revised: August 1,

19 Subpart E - Rate of Return Reports (R-3) Rate of return reports. (a) Subpart E shall apply to those interstate communications common carriers and exchange carriers that are so designated by Commission order. (b) Each local exchange carrier or group of affiliated carriers which is not subject to through of this chapter and which has filed individual access tariffs during the preceding enforcement period shall file with the Commission, within three (3) months after the end of each calendar year, an annual rate of return monitoring report which shall be the enforcement period report. Reports shall be filed on the appropriate report form prescribed by the Commission (See of this chapter) and shall provide full and specific answers to all questions propounded and information requested in the currently effective report form. The number of copies to be filed shall be specified in the applicable report form. At least one copy of the report shall be signed on the signature page by the responsible officer. A copy of each report shall be retained in the principal office of the respondent and shall be filed in such manner as to be readily available for reference and inspection. Final adjustments to the enforcement period shall be made by September 30 of the year following the enforcement period to ensure that any refunds can be properly reflected in an annual access filing. (R-8,15,16) (c) Each interexchange carrier subject to ss through shall file with the Commission within three (3) months after the end of each calendar year, the total interstate rate of return for that year for all interstate services subject to regulation by the Commission. Each such filing shall include a report of the total revenues, total expenses and taxes, operating income, and the rate base. A copy of the filing shall be retained in the principal office of the respondent and shall be filed in such manner as to be readily available for reference and inspection. (R-7) (d) (1) Each local exchange carrier or group of affiliated carriers subject to through of this chapter shall file with the Commission within three (3) months after the end of each calendar year a report of its total interstate rate of return for that year. Such filings shall include a report of the total revenues, total expenses and taxes, operating income, and the rate base. Reports shall be filed on the appropriate form prescribed by the Commission (see of this chapter) and shall provide full and specific answers to all questions propounded and information requested in the currently effective form. The number of copies to be filed shall be specified in the applicable report form. At least one copy of the report shall be retained in the principal office of the respondent and shall be filed in such a manner as to be readily available for reference and inspection. (R-8,9) (2) Each local exchange carrier or group of affiliated carriers subject to through of this chapter shall file with the Commission within fifteen (15) months after the end of each calendar year a report reflecting any corrections or modifications to the report filed pursuant to paragraph (d)(1) above. Reports shall be filed on the appropriate form prescribed by the Commission (see of this chapter) and shall provide full and specific answers to all questions propounded and information requested in the currently effective form. At least one copy of the report shall be retained in the principal office of the respondent and shall be filed in such a manner as to be readily available for reference and inspection. (R-9,15) 13 Revised: August 1, 1998

20 65.700/65.702(a) Subpart F - Maximum Allowable Rates of Return (R-1) Determining the maximum allowable rate of return. (a) The maximum allowable rate of return for any exchange carrier's earnings on any access service category shall be determined by adding a fixed increment of four-tenths of one percent of the exchange carrier prescribed rate of return. (b) The maximum allowable rate of return for any exchange carrier's overall interstate earnings for all access service categories shall be determined by adding a fixed increment of one-quarter of one percent to the exchange carrier s prescribed rate of return. (c) The maximum allowable rate of return for rates filed by local exchange carrier subject to 61.50, shall be determined by adding a fixed increment of one and one-half percent to the carriers presubscribed rate of return. (R-12,15) Period of review. For both exchange and interexchange carriers subject to this part, interstate earnings shall be measured over a two-year period to determine compliance with the maximum allowable rate of return. The review periods shall commence on January 1 in odd-numbered years and shall end on December 31 in evennumbered years. (R-15) (b)-(d) [Removed] (R-15) Measurement of interstate service earnings. (a) For exchange carriers, earnings shall be measured separately for each access service category for purposes of determining compliance with the maximum allowable rate of return. The access service categories shall be: an aggregated category consisting of Special Access, , and Contribution Charges for Special Access Expanded Interconnection, ; Connection Charges for Expanded Interconnection, ; Common Line, ; and an aggregated category consisting of Line Termination, , Intercept, , Local Switching, , Transport, , , , and Information, The Billing and Collection access element shall not be included in any access service category for purposes of this part. The Commission will also separately review exchange carrier overall interstate earnings subject to this part for determining compliance with the maximum allowable rate of return determined by (b). (R-10,11,13,15) Revised: August 1,

21 65.702(b)/ Measurement of interstate service earnings. (R-15) (Cont'd) (b) For exchange carriers, earnings shall be measured for purposes of determining compliance with the maximum allowable rates of return separately for each study area; provided, however that if the carrier has filed or concurred in access tariffs aggregating costs and rates for two or more study areas, the earnings will be determined for the aggregated study areas rather than for each study area separately. If an exchange carrier has not utilized the same level of study area aggregation during the entire two-year earnings review period then the carrier's earnings will be measured for the entire two-year period on the basis of the tariffs in effect at the end of the second year of the two year review period; provided, however, that if tariffs representing a higher level of study area aggregation were not in effect for at least eight months in the second year, then the carrier's earnings will be measured on the basis of the study area level of aggregation in effect for the majority of the two year period; provided further, that any carrier that was not a member of the National Exchange Carrier Association or other voluntary pools for both years of the two-year review period will have its earnings reviewed individually for the full two-year period. (R-15) [Removed] (R-15) 15 Revised: August 1, 1998

22 65.800/65.820(d) Subpart G - Rate Base (R-5) Rate base. The rate base shall consist of the interstate portion of the account listed in that has been invested in plant used and useful in the efficient provision of interstate telecommunications services regulated by this Commission, minus any deducted items computed in accordance with Definitions. As used in this Subpart "account xxxx" means the account of that number kept in accordance with the Uniform System of Accounts for Class A and Class B Telecommunications Companies in 47 CFR Part Included items. (a) Telecommunications Plant. The interstate portion of all assets summarized in Account 2001 (Telecommunications Plant in Service) and Account 2002 (Property Held for Future Use), net of accumulated depreciation and amortization, and Account 2003 (Telecommunications Plant Under Construction), and, to the extent such inclusions are allowed by this Commission, Account 2005 (Telecommunications Plant Adjustment), net of accumulated amortization. Any interest cost for funds used during construction capitalized on assets recorded in these accounts shall be computed in accordance with the procedures in (c)(2)(x) of this chapter. (R-14) (b) Material and Supplies. The interstate portion of assets summarized in Account (Material and Supplies). (c) Noncurrent Assets. The interstate portion of Class B Rural Telephone Bank stock contained in Account 1402 (Investment in Nonaffiliated Companies) and the interstate portion of assets summarized in Account 1410 (Other Noncurrent Assets), Account 1438 (Deferred Maintenance and Retirements), and Account 1439 (Deferred Charges) only to the extent that they have been specifically approved by this Commission for inclusion. Otherwise, the amounts in accounts shall not be included. (d) Cash Working Capital. The average amount of investor-supplied capital needed to provide funds for a carrier's day-to-day interstate operations. Class A carriers may calculate a cash working capital allowance either by performing a lead-lag study of interstate revenue and expense items or by using the formula set forth in paragraph (e) of this section. Class B carriers, in lieu of performing a lead-lag study or using the formula in paragraph (e), may calculate the cash working capital allowance using a standard allowance which will be established annually by the Chief, Common Carrier Bureau. When either the lead-lag study or formula method is used to calculate cash working capital, the amount calculated under the study or formula may be increased by minimum bank balances and working cash advances to determine the cash working capital allowance. Once a carrier has selected a method of determining its cash working capital allowance, it shall not change to an optional method from one year to the next without Commission approval. Revised: August 1,

23 65.800/65.820(d) 17 Revised: August 1, 1998

24 65.820(e)/65.830(a)(2) Included items. (Cont'd) (e) In lieu of a full lead-lag study, carriers may calculate the cash working capital allowance using the following formula. (1) Compute the weighted average revenue lag days as follows: (i) Multiply the average revenue lag days for interstate revenues billed in arrears by the percentage of interstate revenues billed in arrears. (R-6) (ii) Multiply the average revenue lag days for interstate revenues billed in advance by the percentage of interstate revenues billed in advance. (Note: a revenue lead should be shown as a negative lag.) (R-6) (iii) Add the results of paragraphs (e)(1)(i) and (ii) to determine the weighted average revenue lag days. (R-6) (2) Compute the weighted average expense lag days as follows: (i) Multiply the average lag days for interstate expenses (i.e., cash operating expenses plus interest) paid in arrears by the percentage of interstate expenses paid in arrears. (R-6) (ii) Multiply the average lag days for interstate expenses paid in advance by the percentage of interstate expenses paid in advance. (Note: an expense lead should be shown as a negative lag.) (R-6) (iii) Add the results of paragraphs (e)(2)(i) and (ii) to determine the weighted average expense lag days. (R-6) (3) Compute the weighted net lag days by deducting the weighted average expense lag days from the weighted average revenue lag days. (4) Compute the percentage of a year represented by the weighted net lag days by dividing the days computed in paragraph (e)(3) of this section by 365 days. (R-6) (5) Compute the cash working capital allowance by multiplying the interstate cash operating expenses (i.e., operating expenses minus depreciation and amortization) plus interest by the percentage computed in paragraph (e)(4) of this section. (R-6) Deducted items. (a) The following items shall be deducted from the interstate rate base. (1) The interstate portion of deferred taxes (Accounts 4100 and 4340). Revised: August 1,

25 (2) The interstate portion of customer deposits (Account 4040) (e)/65.830(a)(2) 19 Revised: August 1, 1998

26 65.830(a)(3)/65.830(c) Deducted items. (Cont'd) (3) The interstate portion of other long-term liabilities (Account 4310) that were derived from the expenses specified in (a). (R-17) (4) The interstate portion of other deferred credits (Account 4360) to the extent they arise from the provision of regulated telecommunications services. This shall include deferred gains related to sale-leaseback arrangements. (b) The interstate portion of deferred taxes, customer deposits and other deferred credits shall be determined as prescribed by 47 CFR Part 36. (R-6) (c) The interstate portion of other long-term liabilities (Account 4310) shall bear the same proportionate relationship as the interstate/intrastate expenses which gave rise to the liability. (R-17) Revised: August 1,